Question

e witness the following infomation on Lona's Lil Inc. for the most recent year are shown below, along with the inventory conversion period (ICP) of the firms against which it benchmarks. The firm's new CFO believes that the company could reduce its inventory enough to reduce its ICP to the benchmarks' average. If this were done, by how much would inventories decline? Use a 365-day year.

Cost of goods sold =	$85,000
Inventory =	$20,000
Inventory conversion period (ICP) =	85.88
Benchmark inventory conversion period (ICP) =	38.00

$7,316

Answer 1

Current Inventory Conversion Period (ICP)

Current Inventory Conversion Period (ICP) = Inventory / Cost of goods sold per day

= $20,000 / [$85,000 / 365 Days]

= $20,000 / $232.88 per Day

= 85.88 Days

Required Inventory if Lona's Lil Inc reduces its inventory enough to reduce its ICP to the benchmarks' average

Inventory Conversion Period (ICP) = Inventory / Cost of goods sold per day

38.00 Days = Required Inventory / [$85,000 / 365 Days]

38.00 Days = Required Inventory / $232.88 per day

Required Inventory = $232.88 x 38 Days

Required Inventory = $8,849.32

Decrease in the Value of Inventory

If Lona's Lil Inc reduces its inventory enough to reduce its ICP to the benchmarks' average, then the Inventory would decline to $8,849.32 .